Table of Contents
Most countries used the gold standard to control the value of their national currencies up to the early 20th century. The quantity of gold kept in reserve determined the number of coins and paper money that was minted. However, the First World War’s economic turmoil ended the use of the gold standard in the US and a large portion of Europe. In 1999, Switzerland was one of the last countries to stop using it. Nowadays, various countries employ the fiat money system, in which central banks issue the currencies.
Coming to the 21st century, when blockchain technology first debuted. In the midst of the Crypto market’s continued volatility, Bitcoin has become a well-liked digital asset. In this blog, let’s see what backs Bitcoin and what are backed currencies.
Let’s start the journey!
What is backed currency?
A backed currency is a kind of currency that is backed by another asset and has the assurance that it can always be exchanged for that asset for a specified amount. For example, an ounce of gold may be exchangeable for 100 units of a currency that is backed by gold.
Though the currency can be backed by anything, gold and silver are the most common assets adopted to back a currency. At the beginning of 1879, the US Dollar was backed by gold because of its fungibility and scarcity, which are the important characteristics of money.
Additionally, a currency may be backed by another one. It’s referred to as a pegged currency. By backing a currency, you can ensure that it will always be worth at least as much as what it may be traded for. However, supported currencies are susceptible to losing credibility if the public loses confidence in the competence of the government to uphold the fixed exchange rate. In such a situation, illicit currency exchange markets grow, allowing for a false appearance of the real exchange rate.
Main reasons behind backing currency
Talking about the Crypto world, there are various types of backed currencies, with the most popular ones being fiat-backed and commodity-backed. Fiat-backed currencies are pegged to a specific fiat currency, such as the US dollar, while commodity-backed currencies are pegged to a specific commodity, such as gold or silver.
One of the main benefits of backed currencies is that they provide stability to investors. Since the value of the currency is pegged to a specific asset or currency, investors can be confident that the value of their investment will not fluctuate wildly. This makes backed currencies a popular choice for investors who are looking for a safe haven in the Crypto world.
However, it is worth noting that backed currencies are not immune to market fluctuations. While they may be less volatile than other Cryptos, they are still subject to the same market forces as any other investment.
Is Bitcoin a backed currency?
Bitcoin is basically a decentralized digital currency that is not backed by any physical asset or government. Instead, its value is determined by market demand and supply. The market price of Bitcoin is determined by the number of people who are willing to buy and sell the currency, and this can fluctuate rapidly.
Unlike traditional currencies that are backed by physical assets such as gold or governments, Bitcoin is not backed by anything. This means that the value of Bitcoin is not pegged to any specific asset, like gold or silver, or fiat currency. Instead, entire market forces are responsible for influencing Bitcoin’s prices. The market factors include news, events, and investor sentiment.
Bitcoin is designed to be a decentralized currency that can be used as a means of exchange without the need for a central authority, such as a bank or government. Transactions are recorded on a public distributed ledger known as the blockchain, which is maintained by a network of computers worldwide. This makes it possible to transfer Bitcoin from one person to another without an intermediary.
Bitcoin is often considered a speculative asset as it is not backed by any physical asset or government. This is the main reason why the value of Bitcoin fluctuates rapidly, and investors need to be prepared for the risks associated with investing in such an asset.
Though Bitcoin is not a backed currency in the traditional sense, it has gained significant acceptance as a form of payment and investment. Many merchants now accept Bitcoin as a means of payment, and a growing number of investment vehicles allow investors to invest in Bitcoin directly or indirectly.
Final thoughts: Should you still consider buying Bitcoin?
Bitcoin is considered the upcoming step in financial evolution and is backed by a reliable blockchain ledger. Currently, it is seen as a solution that can tackle the global financial system. However, Bitcoin’s price depends on the investor’s confidence in it.
When we compare Bitcoin to fiat money, there’s no doubt that people have confidence in fiat, but not in Bitcoin, as it is not backed by any physical asset. In the coming future, fiat money will surely be a mainstream currency; but Bitcoin has the potential to provide neck-to-neck competition, as well. The Crypto market is growing at its pace, and Bitcoin follows the same path. Its market value depends on the demand and other market factors of Bitcoin.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.